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What is Fraudulent Conveyance in Bankruptcy?


Under certain circumstances, a bankruptcy trustee can sell some of your assets to satisfy your creditors in part. That is why it is important to speak to a bankruptcy lawyer who can review your allowed exemptions and show how you can exempt some or all of your assets.

It can be tempting to try to hang on to certain very valuable cherished possessions or favorite luxuries. Some people’s first instinct when bankruptcy filing seems imminent is to transfer their property to a third party like a sister or a close friend who can hold it until the bankruptcy is over. Other people will try to sell valuable assets below market value to friends and family to prevent their liquidation through bankruptcy proceedings.

Behavior like this is bankruptcy fraudulent conveyance. It could place you and the people you transfer property to in legal jeopardy and compromise your bankruptcy proceedings.

Fraudulent Conveyance Definition

Under fraudulent transfer law, fraudulent conveyance is a transfer of assets or property with the intent to place those assets or property outside the reach of creditors.

A bankruptcy trustee who uncovers evidence of such transfers is empowered to avoid the transfer if it was made within two years of the filing of a bankruptcy petition.

In Pennsylvania, there is a four year look-back period in which a trustee can see if a property was transferred or was sold below market value.

Types of Fraudulent Conveyances

There are two types of fraudulent conveyances: actual fraud and constructive fraud.

1. Actual Fraud

Actual fraud requires the debtor to have voluntarily transferred property or assets with the intent to hinder, delay, or defraud a creditor.

For a creditor to challenge a transfer as actual fraud, they must prove that the intent of the debtor was to hinder or defraud the ability to collect what was owed to the creditor.

While ultimately the intent must be determined on a case by case basis, certain patterns of behavior are frequently found to be fraudulent. The transfer of most or all of a debtor’s assets to a newly created corporation, or to a person with whom the debtor shares a special relationship, is likely to be viewed with suspicion.  

Federal bankruptcy law sets the look-back period as two years, but state law may extend this period, such as with the Uniform Fraudulent Transfer Act and more recent Uniform Voidable Transfer acts adopted by dozens of states, which extend the period in which a transfer can be challenged as fraudulent to four years.

2. Constructive Fraudulent Transfer

Constructive fraud also involves the transfer of property but lacks the element of intent in actual fraud.

The Federal bankruptcy code sets conditions for constructive fraud. First, the debtor must have received less “than a reasonably equivalent value” for the transfer of property. Second, the debtor must have been insolvent at the time or reasonably expected to be insolvent at the time of the transfer.

Constructive fraud is much more subjective than actual fraud. A person who transfers vast sums of property or assets in the weeks before filing bankruptcy is likely to be accused of acting fraudulently. But a debtor who sold a valuable property well below market value may have simply been unlucky in an unstable property market.

If there is a challenge to a sale or transfer made before bankruptcy, it will be between your bankruptcy attorney and the creditors to argue whether the transfer represented a legitimate bargain or a fraudulent transfer.

Foreclosure sales, even if well below market value, are likely to be viewed as legitimate transfers. So too are normal business transactions to parties with which the debtor shares no special interest.

Timing & Context Matter for Fraudulent Conveyances

The time and context in which a transfer is made play a major role in determining potential fraudulent transfers. Transfers made before the look-back period cannot be avoided by a bankruptcy trustee barring exceptional circumstances. Transfers during the transfer period can be valid but are subject to scrutiny, but are not inherently fraudulent.

The timing in relation to a bankruptcy filing is one of the red flags that are likely to trigger a fraud accusation. Gifting a car to your sister who just started college could look generous if done a year and a half before bankruptcy was filed if your debt was under control. The same gift made a week before filing a bankruptcy petition, or made when a creditor had just secured a judgment against you for unpaid debts, would be much more likely to appear fraudulent.

Preparing for Bankruptcy? Property Do’s and Don’ts


  • retain the service of a bankruptcy attorney.
  • keep copies of receipts and transactions.

Do not:

  • give away valuable property to friends and family.
  • attempt to hide assets or obscure financial records.

How to Legally Keep Your Property

Any reasonable person would want to keep certain pieces of property after filing a Chapter 7 bankruptcy.  And you certainly can keep some of your possessions without committing fraud. There are a series of exemptions that will allow you to keep personal assets up to the statutory limits.

Your bankruptcy attorney can review these exemptions and help you pick the state or federal set that works best for you. For example, the Federal exemption set would allow you to legally retain $12,625 of home goods.

For more information on bankruptcy exemptions and your options for legally retaining all of your property, schedule a free, no-obligation consultation with experienced Philadelphia bankruptcy attorney David M. Offen, who has practiced bankruptcy law for over 20 years and has helped over 12,000 clients get a fresh financial start. Call (215) 625-9600 to start on your journey to a fresh start.

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